Immunocytochemical studies revealed the colocalization of substance P (SP) and acetylcholinesterase (AChE) within the interpeduncular nucleus (ip). In the rat ip adjacent sections were stained for AChE and for SP-immunoreactivity. SP-fibers were found to be precisely colocalized with AChE-fibers in the dorsal cap and the lateral zones. Receptor autoradiography revealed that both muscarinic receptors (H3-QNG ligand) and Alpha-bungarotoxin binding sites (nicotinic receptors) had distributions resembling that of AChE. Neither unilateral nor bilateral lesions of the habenulae changed the number or distribution pattern of the receptors. The presence of SP immunoreactivity in areas of high nicotinic receptor densities provides a morphological basis for the previously suggested modulation of nicotinic responses by SP. The correlation between the localization of SP and AChE raises the possibility of a biologically relevant interaction between the two substances. Prior biochemical studies have provided evidence that AChE from several sources is capable of hydrolyzing SP. This evidence taken in conjunction with our demonstration of SP and AChE colocalization leads us to suggest that one physiological function of AChE in the ip may be to hydrolyze SP, thus terminating its biological activity.